Ethically Challenged Is Not Enough

The U.S. Court of Appeals for the First Circuit has issued an interesting opinion in a research analyst case. The decision – Brown v. Credit Suisse First Boston LLC, 2005 WL 3359728 (1st Cir. Dec. 12, 2005) – affirms the dismissal of securities fraud claims based on alleged false “buy” recommendations made by CSFB’s analysts with respect to the stock of Agilent Technologies.

The court held that the plaintiffs needed to plead facts “sufficient to indicate that the speaker did not actually hold the opinion expressed.” In examining the existence of this “subjective falsity,” the analysis of the falsity of the statement and the defendants’ fraudulent intent (i.e., scienter) cannot be separated. Accordingly, the PSLRA’s heightened pleading standard for scienter should be applied and the plaintiffs must “plead provable facts strongly suggesting that the speaker did not believe [a] particular opinion to be true when uttered.”

Turning to the complaint, the court found that “while the plaintiffs’ allegations regarding the obvious conflicts of interest and general state of corruption within CSFB’s analyst ranks may be enough to turn the stomach of an ethically sensitive observer, they are insufficient, on their own, to support a fraud pleading with respect to the subjective falsity of the eight ‘buy’ recommendations issued on Agilent stock.” In particular, the court rejected a series of CSFB e-mails that suggested its analysts engaged in “sharp practice,” but fell short of creating a strong inference that any particular “buy” rating did not reflect the personal belief of the analyst in question.

Holding: Dismissal affirmed.

Quote of note: “The plaintiffs’ allegations, if true, show beyond hope of contradiction that the defendants operated without much concern for ethical standards. But the fact that an organization is ethically challenged does not impugn every action that it takes. In a securities fraud case, the plaintiffs still must carry the burden, imposed by the PSLRA, of pleading facts sufficient to show that the particular statements sued upon were false or misleading when made. This is as it should be: the securities laws – and section 10(b) in particular – were designed to provide a damages remedy for losses incurred as a result of false or misleading statements, not to punish defendants for bad behavior in a vacuum.”

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